China hacks the press

While the FBI probed whether it gave some traders an early look at government data

Yesterday The New York Times ran this remarkable story about how Chinese hackers, presumably aligned with the military, hacked into its computers during and after it was reporting its big scoop on the familial riches of prime minister Wen Jiabao.

The Times reports that Chinese hackers also attacked Bloomberg, which this summer ran a huge story on corruption at the top levels of China.

Now, The Wall Street Journalreports China hacked into its computers too. The question now becomes who didn’t China hack? In a networked age, nothing is unhackable, essentially. If you’re going to keep notes from your high-level Politburo sources in Word docs or whatever, it’s probably best to keep their names off them.

The NYT says China started targeting journalists five years ago “as part of an effort to identify and intimidate their sources and contacts, and to anticipate stories that might damage the reputations of Chinese leaders.” And the WSJ says, “The Federal Bureau of Investigation has been probing these media incidents for more than a year, and considers the hacking a national-security case against U.S. interests, according to people familiar with the matter.”

So far it’s unclear if any top-secret sources have been exposed to China’s spies. But China probably couldn’t care less that its hacking effort has been unearthed. The chilling effect on future potential sources is going to make reporting on it that much harder.

If this kind of journalism has extraordinary value to someone like the Chinese government, which controls the flow of information within its borders (more or less), it’s worth thinking about how much journalism can be worth to businesses, particularly traders, and to the potential problems with some people getting news before everybody else.

Last week, the Journal reported that the FBI has investigated whether Dow Jones, along with Bloomberg and Reuters, gave market-sensitive government data early to certain subscribers.

We know how tough the government can be on insider trading, as opposed to, say, securitization fraud, so this was serious. The paper says that “investigators decided against filing charges because they couldn’t link the pattern to specific actions by media companies.”

The media would be all over this story if it were about Wall Street releasing market-moving information to favored investors, and the Journal gives it good play. But there’s been little follow-up elsewhere, except for Reuters, which follows the Journal too closely. Its first five paragraphs match the WSJ’s almost word for word.

The Journal reports that the Labor Department says reporters have complained for years about their competitors cheating the system, which is like no other in journalism:

To maintain a level playing field for investors, government agencies have created protocols for releasing economic reports. The Labor Department, for instance, uses a lockup system in which reporters with media credentials gather before 8 a.m. and receive data on the promise they won’t publish before the embargo lifts at 8:30 a.m. Such a system was designed years ago to give reporters time to craft their articles. It grew partly out of a 1905 scandal in which traders obtained confidential cotton-crop estimates.

At lockups, news organizations have been required to plug their computers into a device called a “black box” tied to a central switch, which blocks computer transmissions until the embargo lifts. To make sure it lifts at precisely 8:30 a.m., the Labor Department has an atomic wall clock timed to the Naval Observatory Master Clock. The ritual is repeated roughly 10 times a month at the department.

While most reporters at the lockups just write articles, data providers also focus on getting the numbers to clients instantaneously. Dow Jones, for example, sends two reporters. One writes an article based on the still-confidential data, to be released when the embargo ends. The other writes headlines in software that, when the embargo lifts, will channel the raw figures on a separate feed straight into trading systems created by investors.

What the WSJ doesn’t make clear is whether reporters were believed to be sending out stories early to specific subset of their subscribers or whether to all subscribers. It seems to me that’s a significant difference. If your intent is to scoop your competitor, that’s one thing, however unfair. If it’s to give particular clients a head start, it’s another. I’d like to think if any of this happened, it was the former.

This paragraph is also confusing:

A key issue, one of the people said, was whether the government could prove in court that a time advantage for a trader of a sliver of a second—as little as a few thousandths—was enough to conduct profitable trades on confidential information.

Presumably when there are people spending $300 million to drop a cable into the Atlantic Ocean so they can get trades to and from Europe in 59.6 milliseconds, as opposed to the 64 milliseconds the other chumps will be stuck with, a time advantage is valuable.

In the case of locked-up government data, the press is monetizing its access, essentially. The value is in the headline, which anybody could type up, and not just anybody can get in the room.

But reporting moves markets all the time, and not just from embargoed press releases. In some cases it moves them in major ways. Like when the NYT wiped $10 billion off Walmart’s market cap in one day with its blockbuster bribery and coverup scoop. Or when Reuters took a 10 percent chunk out of Chesapeake Energy in less than one trading session with its reporting on now-defenestrated CEO Aubrey McClendon’s conflicts of interest. Those are outliers, clearly, but reporting moves markets all the time.

It makes you wonder if Chinese military hackers are the only ones trying to get into Dow Jones and Bloomberg and Reuters.

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